Behind Renewable Energy Fines

Are large fines looming if Ireland does not achieve its binding European renewable energy targets? Interinstitutional trilogue negotiations on two key pieces of legislation, which commenced in Brussels in late February 2018, should be watched closely.

While high fines are often discussed as a consequence of this shortfall, this blog post argues that interinstitutional trilogue negotiations on two key pieces of legislation, which commenced in Brussels in late February 2018, should be watched closely: the Revised Renewable Energy Directive (RED II) and the Regulation on the Governance of the Energy Union (Governance Regulation).

An eventual decision by the Irish government on how to comply with the 2020 renewable energy targets will, of course, also have to take into account the ultimate shape of the Union’s renewable energy target to 2030 and its enforcement, which are also currently being discussed in Brussels. The consideration below of 2020 target compliance from a more legal point of view, however, may add some clarity to the discussion on how to proceed.

First, however, it is necessary to disentangle the conflation of different types of cost that Ireland may be required to bear as a consequence of not meeting the 2020 renewables target. There are often discussions of hefty “fines” that Ireland will be “hit with” in case it fails to reach its 16% target. This is a colloquial use of the term “fines”, which are technically a lump sum or penalty payment imposed by the Court of Justice of the European Union pursuant to an action brought by the European Commission. Fines in this sense are an unlikely consequence of Ireland falling short of its renewables target.

It is true that in 2014, the European Commission brought a case against Ireland for failing to implement fully the 2009 Renewable Energy Directive, recommending a penalty payment of €25,445.50 for each day that Ireland had not fully implemented the Directive. Ireland subsequently enacted additional legislative measures to implement the Directive and the Commission discontinued its action.

Further, the 2014 case was one of failure to (fully) transpose a European Directive, and could thus benefit from the 260(3) TFEU procedure, under which the Commission can already request penalty payments in the first judgment by the Court. A failure to reach the 2020 target, on the other hand, would be unlikely to constitute a failure to transpose the Directive, but a failure on the part of Ireland to “fulfil an obligation under the Treaties”. An action by the Commission would thus have to be pursued through the much more time-consuming Article 258 TFEU procedure, which would mean that it could take years before an actual penalty payment is imposed.

Statistical Transfers

It is therefore perhaps more accurate to discuss “compliance costs”, because there is a second type of expense that is much more likely to be incurred by Ireland. These are the so-called “statistical transfers”, introduced by Article 6 of the 2009 Renewable Energy Directive. In a statistical transfer, a specified amount of renewable energy is deducted from one country’s share of renewable energy in gross final energy consumption and added to another’s. This is an accounting procedure and no actual energy changes hands. Further, Member States can only sell statistical transfers if they have already exceeded their nationally binding target, as the Directive states that “a statistical transfer shall not affect the achievement of the national target of the Member State making the transfer”.

Through this mechanism, the Irish government could purchase renewable energy credits from countries that have already exceeded their 2020 targets. Paul Deane of University College Cork estimates that covering a three percent shortfall could cost Ireland between €68 million and €315 million.

It is important to note that the 2009 Renewable Energy Directive cannot directly force Ireland to buy renewable energy credits from other Member States. Rather, this is a means of compliance with the directive, which is likely to be considered in a scenario where the domestic deployment of renewables is projected to be insufficient to meet the target. If the Irish government opts to do so, Ireland would not face hefty fines due to its shortfall, but may choose to buy credits to ensure compliance.

These are complex decisions by Government. Issues to be decided include whether renewables should be deployed at home, in line with Ireland’s longer term ambitions to decarbonise the economy, or whether statistical transfers should be considered if they could provide short-term compliance at lower cost to the tax payer.

However, additional policy uncertainty has been created by ongoing interinstitutional trilogues on two pieces of legislation. Whether or not it makes sense to purchase statistical transfers to achieve compliance with the 2009 Directive might largely depend on the outcome of these negotiations.

2020 Targets under the Proposed New Renewable Energy Directive and the Governance Regulation

In November 2016, the European Commission proposed a Revised Renewable Energy Directive (RED II), which would repeal and replace the 2009 Directive effective from 1 January 2021 (Article 34). This Directive, in conjunction with a proposed Regulation on the Governance of the Energy Union (Governance Regulation), proposes to establish the 2020 targets as a binding baseline renewables share for Member States and includes provisions for the case that a Member State drops below that baseline.

The Council of the European Union has adopted a general approach to both RED II and the Governance Regulation on 18 December 2017, while the European Parliament adopted its negotiating position on 17 January 2018. It is worth considering the legal consequences for Ireland if it does not choose to purchase renewable energy credits to cover a potential renewable energy shortfall.

Article 3(3) of RED II establishes the 2020 targets as a binding baseline for Member States. It is, however, Article 27(4) of the proposed Governance Regulation, entitled “Response to Insufficient Ambition of Integrated National Energy and Climate Plans and Insufficient Progress Towards the Union’s energy and climate targets and objectives” which provides:

If a Member State does not maintain the baseline share of energy from renewable sources in its gross final consumption of energy set out in Article 3(3) of [RED II] from 2021 onwards, the Member State concerned shall ensure that any gap to the baseline share is covered by making a financial contribution to the financing platform referred to in point (c) of the first subparagraph.

This financing platform, set up at Union level, will be “managed directly or indirectly by the Commission”. The proposal does not elaborate on this financing platform, saying that it is the Commission that will adopt delegated acts concerned with its functioning.

The European Council, in its general approach, formulated in a session on 18 December 2017, gives more flexibility to Member States that fall short of their 2020 targets. Member States would be able to choose from a menu of options which the current Commission proposal reserves for states whose climate and energy plans to 2030 lack ambition.

According to the Council, a Member State should choose from the following to cover the gap to its baseline share:

adjusting the share of renewable energy in the heating and cooling sector;

adjusting the share of renewable energy in the transport sector;

making a financial contribution to the abovementioned financing platform; and/or

“other measures” to increase deployment of renewable energy.

Adding even more flexibility to this approach, the Council proposes that Member States should take any of the above measures within one year, and that these measures should aim to close the gap to the baseline share within two years.

The European Parliament, notably, makes no amendments to the Commission’s proposed 2020 target enforcement mechanism, focusing instead on increasing ambition and accountability of Member States towards the 2030 renewable energy target.

Conclusion

If the Commission does not sue Ireland under the 2009 Directive before the Court of Justice of the European Union for failure to reach its renewables targets, which is an unlikely option, the outcome of trilogue negotiations on the enforcement of the 2020 renewable energy targets will be very important for Ireland.

If the approach favoured by the Council prevails, it would give Ireland much more flexibility with respect to its 2020 targets and minimise the risk of high compliance costs. The Council’s proposed additional options for addressing the shortfall, as well as the added flexibility on time would mean that the Irish government would effectively have until the end of 2024 to meet the 16% target before the Commission could initiate infringement proceedings (one year to implement appropriate measures plus two years for these to cover the shortfall). If the “financing mechanism” approach backed by the Commission and the Parliament prevails, much would depend on how contributions to this mechanism would be calculated.

This legal assessment of compliance with the 2020 targets aims to bring more clarity to the discussion around compliance costs. Politically, however, any decision of the Irish government on the purchase of statistical transfers will also have to take into account three important considerations on the 2030 renewable energy targets currently being negotiated in Brussels: first, the 2030 EU-level target itself; second, the trajectory and reference points towards the achievement of this target; and third, the degree to which the European Commission will be able to enforce this trajectory.

About Us

The IIEA is Ireland’s leading European & International Affairs think tank. We are an independent, not-for-profit organisation with charitable status.

Our role is to identify key European and international policy trends, which will inform the work of Ireland’s decision makers and business leaders, and enrich the public debate on Ireland’s role in the EU and on the global stage.